UPDATE 2-Czech c.bank holds rates, governor takes dovish line

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By Jan Lopatka

PRAGUE, Sept 27 (Reuters) - The Czech central bank (CNB) left interest rates flat at its monthly policy meeting on Thursday, in line with expectations it would halt its tightening drive for at least a month on the back of a firming crown.

The bank left the key two-week repo rate unchanged at 3.25 percent, taking a pause after three quarter-point hikes in the past four months.

In a news conference after the unanimous decision to hold policy, Governor Zdenek Tuma struck a slightly dovish note saying the trajectory of rising interest rates may be lower than previously expected if the CNB assesses that the secondary effects of tax changes and regulated prices are small.

"If we make the assessment that perhaps the secondary impacts (of indirect tax changes) are not very significant, then yes ... theoretically it could lead to, for example, the trajectory of interest rates in the next forecast possibly being somewhat lower than it was in the previous one," Tuma said.

Analysts expected the bank to keep rates on hold mainly due to the crown's advance to all-time highs against the euro and the dollar in the past month. But with price pressures in the fast-growing economy rising and analysts have forecast more interest rate tightening in the coming months.

The climbed as high as 27.385 to the euro earlier this month, driven by risk aversion which led to unwinding of carry trades using the crown or the yen as funding currencies to hold positions in higher-yeilding assets.

A strong crown dampens import prices and is a key inflation driver in the small, open central European economy.

The CNB said in a statement that while risks to the overall inflation forecast are pro-inflationary, risks to monetary policy inflation -- adjusted for the primary impact of indirect tax changes -- were anti-inflationary.

The crown traded at 27.575 to the euro at 1422 GMT, up from 27.595 just ahead of the rate decision.

This compares with a central bank forecast of around 29.0-28.2 to the euro, according to calculations made by analysts using data from the bank's quarterly inflation prognosis in July.

Another anti-inflationary factor is the global credit crunch that is casting a shadow over the economic growth and interest rate rise outlook in the euro zone. Tuma said is was still too early to tell what the impact of the market tubulence would be.

The Czech labour market has been tightening, with companies reporting difficulties in recruitment, household spending has been rising as wages grow and food prices rise.

A recent Reuters poll [ID:nL:20199732] showed most analysts expected one more tightening by the year end, and the 12-month forecast called for the repo rate to rise to 3.50-4.25 percent.

"The crown development clearly represents downside risk to the CNB inflation forecast at this time," said Stanislava Pravdova, an analyst at Danske Bank.

"This means that a further rate hike might be postponed more into the future. However, we still expect one more rise in interest rates this year.